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Businesses rely on various margins, including merchandise margins, to determine the overall financial health of the business. Financial margins indicate profits and losses on a quarterly or yearly basis. Merchandise margins help business owners recognize a profitable product from less profitable, or completely unprofitable, products to make changes to existing and new product lines to increase profitability.

Merchandise Margin

Merchandise margin is the amount or percentage of the profits earned after covering production costs. Production costs include the materials, labor and equipment used, but does not include other costs, such as administrative, marketing or leasing costs for equipment or space. These costs fall under a business' operating margin. Merchandise and operating margins are included when calculating the gross margin of a business or total earnings before taxes. Merchandise margins also reflect price markups or discounts to achieve more sales. For example, if it costs $2 to produce an item and you sell it for $4, the merchandise margin would be $2 or 50 percent per product item. If, during the holiday season, you discount the product to $3, the merchandise margin would change to reflect the discount.

Importance

Businesses use merchandise margins to estimate the overall product earnings on a quarterly or yearly basis. If margins shrink due to deep discounts or fewer sales, the product may be replaced with a newer version, or taken off the market completely. Merchandise margins, when broken down by region, indicate how well a product sells in a specific area. For example, additional marketing may be necessary to increase sales in that region. In some cases, the product may be offered in limited quantities to increase demand.

Product Pricing

Merchandise margins can be used to determine pricing thresholds for brand new items or similar items. If, after a few months on the market, a product does not earn enough to cover costs or meet profit goals, the product may undergo a price adjustment. Businesses rely on past merchandise margin reports to determine a solid starting price to avoid having to make price adjustments later on.

Sales Forecasting

Merchandise margins are used to estimate how much a business will earn quarterly or yearly. Businesses follow margin trends from quarter to quarter to determine how well a product will sell. Barring new competition, slowing economy or other financial disaster, merchandise margins provide a good indication of how well a product will sell over a longer period of time.

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About the Author

Based in the Washington metro area, Jessica Jones has been a freelance writer since 2006, specializing in business topics. Her fiction has also been featured in publications such as "The Jamaican Observer Sunday Literary Supplement" and at websites including HackWriters. Jones earned a Master of Fine Arts in fiction writing from Lesley University.

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Jones, Jessica. "What Is a Merchandise Margin?" Small Business - Chron.com, http://smallbusiness.chron.com/merchandise-margin-22446.html. Accessed 14 September 2019.

Jones, Jessica. (n.d.). What Is a Merchandise Margin? Small Business - Chron.com. Retrieved from http://smallbusiness.chron.com/merchandise-margin-22446.html